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Market-neutral funds are a subset of long/short equity strategies. Both market-neutral and more standard long/short equity strategies combine both long and short positions in stocks to mitigate portfolio volatility and to capitalize on the downside of correctly identified underperformers. But while traditional long/short strategies typically remain net long , market-neutral funds aim to balance their long and short holdings to generate returns that are entirely uncorrelated with the broad market. Alternative mutual funds pursuing market-neutral strategies provide investors with professional security selection and portfolio management. These funds, which aim to achieve positive returns regardless of overall market conditions, eked out a tiny aggregate gain of 0.12% in September, according to Morningstar, but there were several that greatly outperformed – and others that posted significant monthly losses. Top Performing Funds in September The Invesco All Cap Market Neutral Fund (MUTF: CPNAX ) was the top-performing mutual fund in Morningstar’s Market Neutral category for September, returning +7.03% for the month. This brought the fund’s year-to-date gains through September 30 to +7.63%. In the third quarter, the fund posted huge gains of 15.01%, boosting its one-year returns to +8.64%. The fund, which debuted in December 2013, had assets under management (AUM) of $32.1 million, accounting for just a tiny fraction of the category’s $25 billion total AUM. The AQR Equity Market Neutral Fund (MUTF: QMNIX ) was the second-best performer in the category in September, gaining 5.79% for the month. The fund, which debuted October 7 of last year and had $127.6 million in AUM as of October 19 of this year, gained an impressive 14.99% in the first nine months of 2019. Finally, the Vanguard Market Neutral Fund (MUTF: VMNIX ) rounded out the category’s top-three performers with September gains of 5.11%. Unlike the other funds mentioned thus far, which have debuted in the past two years, VMNIX has a much longer track record – through September 30, the fund had generated respective three- and five-year returns of +6.19% and +4.67%, easily besting the category averages of +1.04% and +1.49%, respectively. The fund debuted on October 19, 2008 and had $446.2 million in AUM precisely seven years later. Worst-Performing Funds in September The worst-performing market-neutral mutual funds for September were: Castlerigg Event Driven and Arbitrage Fund (MUTF: EVNTX ) Visium Event Driven Fund (MUTF: VIDIX ) The Arbitrage Event-Driven Fund (MUTF: AEDNX ) The Castlerigg fund debuted in February 2015. It lost 4.72% in September and a painful 10.37% in the first nine months of 2015 – ouch! The fund had just $10.3 million in AUM, as of October 19. The Visium fund is another small and underperforming market-neutral fund. It lost 4.70% in September, barely outpacing Castlerigg, and it was down 9.14% for the year ending September 30. The Visium fund’s AUM, as of October 19, were $23.4 million. Finally, the Arbitrage Event-Driven Fund rounded out September’s list of market-neutral underperformers, with monthly losses of 3.73%. But this much bigger fund, which debuted in 2010 and had $357.5 million in AUM as of October 19, has a much longer track record than last month’s other laggards: For the five years ending September 30, 2015, the fund returned an annualized +0.63%. Unfortunately for investors who didn’t buy in before 2012, the fund’s returns for one- and three-year periods, as well as three- and nine-month terms, were all negative. Conclusion A recent white paper by Northwestern Mutual further explains the benefits and drawbacks of market-neutral strategies and market-neutral mutual funds in particular. According to Northwestern, these funds “tend to generate consistent returns that are above the historic U.S. Treasury Bill rate (3-6%) whether the market is up or down” – and this makes them particularly attractive amid the current market environment. Scalper1 News
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